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Individuals give property away during their lifetimes for many reasons. In this particular column, I would like to discuss some of the motivations for lifetime giving other than for the purpose of obtaining tax savings and benefits.

Privacy
A primary reason many individuals (often referred to as donors) give assets away is that, for the most part, a gifting party can transfer property with a certain amount of non-recognition by anyone other than the recipient (donee). In other words, gifting generally provides a certain amount of privacy.

Clearly, others who interact with the donee may learn or see that he or she has received a particular asset, but if the transfer involves money, securities, bonds or certain intangible assets, no one — including your inquisitive Aunt Tilly, your judgmental Uncle Harry or your not-to-be-outdone sibling — really has reason to know.

Interestingly, it is possible that if the donor makes a transfer in trust, the beneficiary may not even be aware of the gift. For example, if you establish a trust and the trust terms provide for distributions of income or principal to commence when the youngest beneficiary reaches age 30, it is possible none of the named beneficiaries would know about the gift until they receive something from the trust at the designated time.

On the other hand, depending on the character of the gifted asset, it may be necessary for others besides the donee to know of the transfer. For instance, (1) if land is the subject of the gift, the deed is likely to be recorded at the local courthouse, where it then becomes information that is available to the public; (2) if a car is gifted, the title is changed; and (3) when securities are the subject of a gift, registration in the name of the new owner is undertaken.

Although in these situations, other individuals may play a role in the transfer or may discover the transfer because it is recorded, interactions usually involve people who are distant from the donor’s personal life.

Reduction of probate and administrative costs
Another positive reason for making lifetime gifts is that by removing the asset and its value from your ownership, you may be able to reduce the amount of probate expenses and administrative costs your estate has to pay. Assets that a deceased person leaves to others under his or her will are probate assets. Non-probate assets are those items or interests that pass:
(1) by the terms of most trusts,
(2) by the way property is titled, such as joint with right of survivorship, or
(3) by beneficiary designation, as with life insurance.
Since probate property is overseen by the local court in the deceased’s state, the court imposes a fee on the estate for its efforts. In most states, probate fees are not that expensive — especially with respect to the value of oversight given.

Another probate expense involves executor and attorney fees. While it is not always the case, in some estates, executors’ and attorneys’ fees are based on a percentage of the value of probate assets. If, however, gifts are made during one’s lifetime, those items are no longer available for any probate-related charges.

Protection from creditor claims
If a donor makes gratuitous transfers of property during his or her lifetime and then later becomes insolvent or is otherwise subject to the claims of creditors, those assets are not reachable by the donor’s creditors. All states, however, have anti-fraudulent conveyance acts which disallow transfers of property to others once an individual knows or had reason to know that he or she was subject to the claims of creditors. Otherwise, individuals could avoid creditors by transferring their worldly goods to others.

Enjoyment of seeing the recipient receive and enjoy the gift
Not to be underestimated is the great pleasure a donor receives from seeing and hearing the donee’s happiness when a gift is received. Although some enjoyment is derived when you tell someone you are leaving them something in your will, it is still not as enjoyable as seeing the recipient actually acquire the gift and express how much he or she appreciates it. When you give a gift during your lifetime, you know for sure that the intended donee received it. You can rest easy, knowing that there will be no will contests or concerns that someone else obtained the asset, or that your estate no longer owned the item at your death.

Opportunity for the donor to see how well — or how poorly — the donee manages the gifted property
When you make a gift during your lifetime, you also have the opportunity to observe the donee’s management of the property.

For example, let’s say you gave your college-age nephew $50,000 with the intention of seeing what he does with it. Now let’s suppose that after thanking you profusely, your nephew invites four of his closest fraternity brothers to Las Vegas for a never-to-be-forgotten long weekend where they plow through the money faster than the speed of sound. You might have some second thoughts about future gifts.

In this case, you are most likely not going to be in a hurry to give your nephew anything more. Or, if you do, you might make the gifts in trust, with distribution restrictions. Now, suppose instead that your nephew invested most of the gift and monitors his investments carefully. You realize the gift was wisely given, and you will not hesitate to make future transfers to your nephew in the future.

Provide for the education, support and financial well-being of one or more others
A final advantage of making gifts during one’s lifetime is that a donor can help make the previously unattainable, possible. A student can achieve a superior education, better living conditions can be provided and a donee’s overall financial well-being can be enhanced. Making gifts in this way may result in life-altering improvements in the lives of others, and can bring immeasurable satisfaction to all parties concerned.

About the Author

Constance J. Fontaine, JD, CLU®, ChFC® is an Associate Professor of Taxation and holds the Larry R. Pike Chair in Insurance and Investments at The American College. Professor Fontaine’s areas of expertise include estate planning and gift taxation. She holds the Cha... More